See here
for the documentation and here a screenshot of the association of a NSF
project with an on disk project:

Here is Ishfak's description:

<<Eclipse plugins for the popular source
control providers (CVS, SVN, RTC) do not yet support virtual projects i.e.
they only work with project that are saved on disk. Hence, user needs to
use a project on disk that mirrors the virtual NSF project to perform source
control operations. Designer's source control enablement feature, in its
current form, currently supports the following functionality:

1. It provides a way to easily create
a mapping between virtual NSF project and a project on disk via menu "Create
association with on-disk project".

2. While creating the association, user
needs to select the direction of the initial sync which can be either,
"Export from NSF to on-disk project" or "Import into NSF
from on-disk project".

3. When initial direction is set as
"Export from NSF to on-disk project", an initial sync will export
all the contents from virtual NSF project to the on-disk project in a suitable
format, which user can commit to source control repository.

4. When initial direction is set as
"Import into NSF from on-disk project", the initial sync will
update the NSF project with the content from disk based project.

5. There are 2 different ways to represent
the design elements on disk depending on the type of the design element.- XPages, Custom controls, Style sheets,
Files, Themes, Composite Applications, Wiring properties, JS/SSJS/LS script
libraries are represented as a set of 2 files on disk, the content file
and the metadata file. Content file has the actual file content as seen
in the editor and the metadata file contains the DXL minus the content
to represent rest of the attributes of the design element.- Rest of the design elements, Form,
View, Pages, Java script libraries, Agents, Shared Actions, etc are represented
as a file containing the DXL of the design element.- A preference is provided to use "Binary"
format for DXL for the exported content.

6. There is also a preference to enable
implicit export of design elements after they are modified inside NSF by
user. If this preference is selected any edits to the NSF project (e.g.
create/update/delete of a form, XPages, etc) are reflected to the on-disk
project implicitly, which user can then commit to the source control repository.

7. There is also a preference provided
for allowing implicit import of design files from disk into NSF when they
are modified in the disk project. This also needs Auto-build to be ON.
After setting this preference, if user updates the disk project with the
contents from the repository,the changes would get auto-imported inside
NSF.

8. There is an explicit menu provided
, "Synchronize NSF with on-disk project", to trigger the sync
manually.

9. In the current form, this feature
doesn't yet address the UI integration with Designer perspective.>>